The key to America’s economic future?

Dave SchulerJune 11, 2006

Over the last week or so Mark Thoma of Economist’s View has posted twice on the “Creative Economy” and its role in America’s economic future, first here and then here. The remainder of this post is devoted to an expansion on a question I asked Mark in the comments of the first post.

For the last two presidential administrations, the Clinton Administration and the Bush Administration, that education is the key to America’s economic health and the future prosperity of American workers, has been a persistent mantra. Is it true?

The usual form that the admonition has taken is an emphasis on “knowledge workers”, a distinction that I find particularly grating since it implicitly distinguishes between people who know something who are prospering and people who don’t know anything who aren’t. I find it grating because it’s so false. Knowledge doesn’t set prices, supply and demand does.

And yet it’s undeniable that those with advanced degrees are doing better than those without them.
Does this translate into education as a secure base for an economic future for American workers? I have my doubts.

There’s an explanation other than education for identifying which workers have benefited over the last twenty years or so and which have not: protection. Professionals are protected by licensing and regulation and, in some cases outright bans e.g. telemedicine. Some industries are so highly regulated that entry is extremely expensive e.g. banking, insurance. Copyrights and patents provide protection from competition. And so on.

Industries and workers who have not been comparably protected have not prospered as those who have. There’s more competition.

I think there are some clues that this is what is actually happening. Consider, for example, college enrollments by high school graduates.

Note in the “Total” line that the greatest increase in growth was 1985 to 1997 or so and in the economy’s greatest period of growth in the late 90’s college enrollments actually went down. Enrollments as a percentage were flat in 2003 and 2004. They actually increased slightly in 2005.

One explanation (a favorite among foreigners commenting on the subject) is that Americans are lazy. This explanation ignores, of course, the reality that American workers work more hours than other workers in comparable economies.

Another explanation is that Americans are stupid. I think that both of these explanations are probably false and that young Americans are shrewd observers of the market and are actively pursuing jobs that offer greater protection which may or may not have anything to do with a college degree. From the article cited in Mark’s post:

Such remarkable job growth goes far beyond technology and engineering. While the U.S. economy will add 950,000 computer jobs and another 195,000 in engineering, the biggest gains by far will be in health care and education, which will add more than 3.5 million. Jobs for college professors alone are projected to increase by more than half a million. Arts, music, culture, and entertainment will contribute some 400,000 new jobs. That’s twice as many as engineering.

Every job in this list is protected by non-portability, licensing, copyright, patent, or cartel. Interesting by their omission from the list are government jobs. The greatest net increase of jobs over the last five years has been in federal, state, and local government jobs and no industry is so protected as the government.

So, again, here’s my question: how do you disaggregate the effects of education from the effects of protection for which workers prosper and which do not? Perhaps some of my amateur or professional economist readers can provide an answer.

The answer to this question is important for policy reasons: it marks the difference between whether increased subsidization or other encouragement of education or revising our attitudes about protection will be of greater help in improving the economic futures of Americans.

Correct me if I’m wrong, but it seems like you’re conflating job growth with wage growth in your analysis. Protections such as licensing, etc., shouldn’t have anything to do with job growth precisely because they are barriers to entry. They do protect already-existing jobs as well as wages of those performing them. But I don’t see how they’d stimulate the significant job growth Thoma details. If anything, they should decrease job growth in those fields somewhat.

That said, what with robots performing surgery on heart patients, it is only a matter of time before “knowledge workers” also start losing their jobs through mechanization as well as through outsourcing.

I think it’s doing both, Tom. Investment is following protected industries and leaving unprotected industries. The protected industries are expanding. Consequently, you see job and wage growth in those industries.

I think there are better examples of how technology will undermine the strategy better than robot surgeons. For example, work that was performed by domestic radiologists being outsourced to India. Or surgical tourism. It’s hard to say what impact robot surgeons will have on the incomes of flesh-and-blood surgeons. I suspect that it will be negligible due to work rules similar to those put in place in the railroads early in the last century in which there were crews of essentially idle workers required.

The bottom line for me is that I don’t really know what’s going on here and I’d really like to get an answer to my question. What concerns me is that policy may be pursing appealing but flawed reasoning.

I think it’s doing both, Tom. Investment is following protected industries and leaving unprotected industries. The protected industries are expanding. Consequently, you see job and wage growth in those industries.

I’m intrigued by your thesis, but I need to see more evidence for it. Why would investment follow specifically those industries whose laborers enjoy more job protections? Are you saying it’s just a coincidence, or that there’s an economic incentive for investors to prefer those industries?

I don’t think education, in and of itself, is the answer either. I think that misunderstands the fundamental changes that globalization is putting us through. What we need, to borrow a quote I heard this weekend, are new “social technologies” that are suited better to the post-industrial age.

Also agreed about the robotic surgeons – I chose that as an illustrative example for dramatic effect, not accuracy. But I do think that information technology and robotics together are going to continue dramatically changing the way we work – and possibly make our current concepts of “work” outdated in a few decades. And no, I’m not a Ray Kurzweil-style futurist.